Best Buy: Don't Buy The Hype

On Tuesday morning, Best Buy (NYSE:BBY) reported stronger than expected first-quarter earnings after a tumultuous year with a steady decline in the stock's price. This year has been marked by the company's long standing CEO Brian Dunn stepping down along with retailers like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) infringing on BBY turf and making it nearly impossible for the company to drive sales without major change. The first-quarter results excited Wall Street at the release and sent the stock up 7.33%. The results are as follows:

Click to enlarge(Click to enlarge)

(BBY First-Quarter Results)

These results beat what analysts were expecting, but do not show clear signs of growth in profit. The company's comparable store sales are the most concerning as they point to a 5.3% decrease in sales. This is so concerning because it illustrates that BBY is losing marketshare to others like AAPL and AMZN and the only way the company could turn its revenue around is by lowering prices to a level that would be sure to bankrupt the company. This bring us to the key point: though BBY may have exceeded analysts expectations for FY13 Q1 and the stock is trading at only 4.33 times forward earnings, the fundamental business model of BBY is not only flawed, it is unsustainable.

From an investment perspective, there is no clear evidence that BBY will be able to turn around its falling revenue and profit. This is in large part because the company's inconsistency in leadership. Earlier this year BBY CEO stepped down and as of May 22nd, the company's CFO Ryan Robinson will be leaving the company for MedExpress. The argument is not that change is bad, but that without a consistent strategic vision, the company is bound to fail. In the same way that Radio Shack (NYSE:RSH) has been on a steady decline due to fundamentally not offering consumers something different and that they need, BBY is on that same track. Without a clear plan with strategic goals to move the company in a direction that more directly competes with AMZN, BBY is setting itself up for failure.

Some view the company's valuation as such that it cannot be a bad buy. Below is a summation of the company's key financials:

Forward Price/Earnings: 4.88

PEG Ratio: 1.02

Enterprise Value/EDIDA: 2.19

Return on Equity: 5.66%

Cash-Debt: -$1.01 Billion

The problem lies in the fact that if the company is unable to turn around it business model and be fundamental sound and on the right track, these financial indicators will not improve. In most circumstances, if a company if cheap the downside is more limited. The problem with BBY is that the company has not illustrated that it can perform in the current day environment with AMZN and other internet retailers. Without positive results that can be quantified by a strategic plan in place, BBY is not worth the risk.

Click to enlarge(Click to enlarge)

(Yahoo! Finance)

Unless BBY is able to bring its business model into the 21st century, there is no reason this chart will look any different in the long-run. Though the market may react to short-term signs of restructuring with stock price spikes, in the long term BBY needs to lay out a clear strategic vision to take on AMZN and the countless others invading on its turf.